M&A transactions in the tech industry involve a range of complex factors, from financial assessments and tax strategies to navigating regulatory compliance and IP rights. However, one often-overlooked element is insurance risk management, for both buyers and sellers. Whether you’re acquiring or selling a cloud-computing firm, a software startup, or an AI company, understanding your risks and liabilities—and how to protect yourself—is crucial.

Buyers and sellers alike: keep reading to learn more about key risks and insurance considerations to set yourself up for success during the M&A cycle and minimize your post-transaction risk!

2. Prior Acts

Acquiring a tech company often means taking on liabilities related to past actions, such as software defects, compliance violations, or unresolved IP claims. As a buyer, you’re now responsible for insuring any historical acts from before the acquisition. If a claim occurs for a past incident, it’ll need to be reported to your insurance company, not the seller’s—unless you’ve made an alternate insurance coverage arrangement before closing the transaction.

But no matter how meticulously you’ve done your homework, there will always be unknowns about a firm’s past actions, management decisions, internal processes, and more. Even if a target company seems compliant, potential challenges related to outdated technology or improper data management could very well surface long after the deal is closed—sometimes even years later.

For example, data privacy regulations, like Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA) or the General Data Protection Regulation (GDPR) for international operations, impose strict rules on how data must be handled. A breach that occurred before your acquisition could lead to significant fines or legal action, especially if it’s uncovered after the acquisition is finalized.

PRO Tips:

• Request full disclosure of any past incidents that could result in claims, particularly regarding data breaches, intellectual property rights, and employee disputes—it’s their responsibility to do so, and failure to disclose could constitute misrepresentation. If the seller is aware of any known circumstances that could give rise to a claim, they should also be reporting these events to their own insurance company, while their current policy is still active. Finally, ask for a “loss run” or “claims letter” from their insurance carrier on each of their commercial policies so you can see their past claims history; this will give you a better idea of what to expect in the future.
• If the company you’re acquiring operates under a claims-made insurance policy, ask them to purchase an Extended Reporting Period (ERP), also known as a discovery period, or tail coverage. An ERP will protect you from incidents that occurred while the policy was active but were only discovered after cancellation or non-renewal, and will provide a safety net for any issues that arise post-acquisition.

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3. Cyber Risk

With the increase in cyber-attacks and ransomware targeting Canadian tech companies, cybersecurity risks are among the top concerns in M&A deals. When you acquire a company, you also inherit their cybersecurity practices—which may include hidden vulnerabilities. If the seller’s systems are compromised by malware, this could extend to your own network post-acquisition, leading to privacy breaches that expose sensitive client data. An incident like that could cause serious damage to your company’s reputation, as well as significant financial loss.

It’s not uncommon for cyber-attacks to go undetected for months, meaning a tech company you acquire could unknowingly be harbouring ransomware or other malicious software that doesn’t come to light until after the acquisition. Unfortunately, these risks aren’t always covered by standard Cyber Insurance, which means that you would be left responsible for covering the cost of a cyber incident out of pocket.

PRO Tips:

• Conduct thorough cyber audits on both your network and the seller’s to uncover any vulnerabilities. Consider cleaning up any unnecessary data to reduce the exposure risk of sensitive information on your network. Take note of the software and technology platforms the seller uses. If they’re outdated, they could be more susceptible to cyberattack. Be sure to scan them for potential cyber threats and determine how they’ll be integrated into your existing infrastructur Consider any extra costs or training requirements.
• Review your Cyber Insurance policy to make sure you’re covered against potential data breaches and cybersecurity threats related to the acquisition. Ensure that the seller’s Cyber Insurance policy covers ransomware and that they’ve added an ERP for reporting potential breaches that occurred prior to the closing of the transaction but were discovered afterwards. Consult your insurance broker for extra guidance on bolstering your Cyber Insurance coverage where needed.
• Boost your cybersecurity practices to prevent your data from falling into the wrong hands. Here’s a guide to help you get started: Prepare Now or Pay Later: How Can Businesses Mitigate the Risk of Ransomware?

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4. Intellectual Property Risk

For Canadian tech firms, intellectual property (IP), including software, patents, and proprietary technology, is often the most valuable asset—as well as the driving force behind many M&A transactions. But you guessed it: acquiring a company means you’ll also be acquiring any ongoing or potential IP disputes.

In an industry where you and your peers are constantly working with cutting-edge innovations, the risk of unintentionally infringing on another company’s intellectual property (or facing infringement on yours) is omnipresent. The last thing you need after acquiring a company is to be blindsided by a costly IP-related legal dispute, especially against a large company with greater financial resources!

Plus, most standard Professional Liability Insurance policies exclude IP-related claims—that’s why it’s essential to make sure that the seller’s IP is properly protected and that no litigation is pending, as this could have a huge impact on the future value of your acquisition.

PRO Tips:

• Understand your risks. To learn more about what IP risks entail, real-world examples of Canadian lawsuits, and how you can safeguard your company, refer to this blog for our top tips: Protect Your IP: Why Tech Firms Should Invest in Intellectual Property Insurance
• Do your due diligence. Review all patents, trademarks, and proprietary technology for legal soundness and check for any ongoing IP disputes. Don’t hesitate to bring in the professionals to ensure all your bases are covered—work with legal experts to understand the scope of the seller’s IP protections and connect with your insurance broker to secure the right coverage against potential infringements.

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5. Transactional Risk

Beyond gaining assets, acquiring a firm also means gaining access to an existing network that was developed over time by the seller, including skilled employees, valued stakeholders, and important clients. However, the success of the integration can hinge on how well the workforce and culture are managed post-transaction. Ensuring key team members are retained as seamlessly as possible is critical, since losing top talent and unique skill sets can undermine the acquisition’s value.

But transactions can be tricky, and there could always be misrepresentations or undisclosed issues that emerge down the road, financial or otherwise. Without the right coverage in your back pocket, you’ll have limited options for recourse. You could pursue the seller for damages under an escrow, but this could end up being difficult if the core employees that you’re looking to retain are involved, or if the seller lacks the financial means to address the issue adequately.

PRO Tips:

• Negotiate Retention Packages and integrate the seller’s leadership team into your transition strategy to ensure the smooth transfer of client relationships and critical projects. For more best practices on talent retention, check out our piece on 10+ Tips for Talent Retention.
• Consider investing in Transactional Risk, or Representations & Warranties (R+W) Insurance. This specialized policy is used by approximately 90% of buyers to manage the complexities of acquisitions and mitigate risks tied to misrepresentation or breaches in warranties. It addresses M&A-specific risks that aren’t included in standard policies, protecting buyers, sellers, and lenders involved in a sale from losses tied to unforeseen deal-related issues. It also safeguards against breaches in the Purchase and Sale Agreement (PSA), allowing buyers to claim compensation from the insurer rather than relying solely on an escrow or the seller. This coverage, typically costing 1.5-3% of the policy limit, not only provides financial security but also boosts deal confidence and speeds up negotiations, enhancing competitive advantage and reducing risk for all parties.

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2. Prior Acts

As a seller, it’s your responsibility to be transparent and inform the buyer of any potential liabilities—both pre- and post-acquisition. For tech firms, this could include issues surrounding intellectual property (IP), data breaches, or software defects. Failure to disclose (whether it’s intentional or not) could result in claims of misrepresentation, lawsuits, or renegotiation of terms, which could jeopardize the status of your deal and negatively impact your relationship with the buyer.

A lawsuit from a buyer for breach of representation and the associated legal fees, damages, and fines could eat up your sale proceeds, and even drive you to bankruptcy in the worst-case scenario—not to mention cause strain on important relationships with business partners and stakeholders. Additionally, not keeping your insurance company in the loop about potential claims could result in denied coverage, leaving you personally responsible for covering the financial losses.

PRO Tips:

• Be upfront with any known liabilities, including pending litigation or intellectual property disputes. Maintain accurate documentation to provide transparency to both the buyer and your insurance provider. This will ensure all parties are on the same page and aware of the risks involved.
• Review your current insurance policies to identify potential gaps. Consider purchasing Extended Reporting Period (ERP) coverage, also known as a discovery period, or “tail” coverage. This will protect you from claims that arise from incidents occurring before the sale but are discovered afterward. Securing an ERP is especially important in the tech industry, where claims related to IP or cybersecurity often take time to surface.

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3. Mismanagement Risks

Directors & Officers (D&O) Insurance is a vital tool that every tech firm should have as part of their risk management strategy, protecting business executives and board members if they’re personally sued for any actual or alleged wrongful acts made during their tenure, such as poor governance, failure to act, financial losses, employment practices, and more. In the tech sector, the most common sources of claims involve employment disputes,  intellectual property (IP), and regulatory compliance, including issues surrounding AI ethics and software licensing.

It’s not uncommon for buyers to require sellers to maintain Directors & Officers (D&O) Insurance and purchase an Extended Reporting Period (ERP) to safeguard against post-transaction claims, whether they’re from shareholders, former employees, investors, or other third parties. Without the proper D&O coverage, you could be personally liable for paying out these claims.

Despite the critical nature of this coverage, smaller tech firms tend to delay buying a D&O policy until a sale is in progress—often to avoid the upfront costs. However, purchasing D&O insurance once a deal is underway can be significantly more expensive, as insurers tend to raise premiums dramatically due to the urgency and increased risk of misrepresentation during a sale. ERP costs are also tied to the annual premium of the D&O policy, resulting in excessive premiums if you wait to purchase this coverage.

PRO Tips:

• Secure D&O coverage well in advance of the sale. Don’t wait until a sale is already on the horizon to begin looking for coverage—it’s just smart risk management in today’s increasingly litigious society. Connecting with your insurance broker early will ensure you have the right protections in place at a reasonable cost, including ERP coverage to safeguard against post-transaction claims. An ERP of 6 years is generally recommended to ensure past tax liabilities can be sufficiently covered.
• Take preventative action to prevent disputes during negotiations. Engage with shareholders, investors, and other relevant parties immediately to address their concerns and curb any potential for litigation. Establish a comprehensive offboarding plan to facilitate a smooth transition of employees to the buyer’s company, and negotiate agreements with key team members to secure their commitment to the new organization.

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4. Transactional Risk

When a buyer is looking to purchase your firm, they’re expecting a transfer of not just key assets, but also key relationships, whether they’re with critical software partners, large clients, or significant investors. Ideally, important individuals from your team would also be retained to ensure continuity of revenue and operations moving forward. If these critical relationships aren’t successfully transitioned post-sale, the buyer could see a decrease in the expected value of the acquisition, leading to financial losses, disputes, or even legal action against you as the seller.

A shareholder agreement is also essential when it comes to the sale of a company, especially if there are multiple shareholders involved. All shareholders must come to an agreement regarding the terms of the sale, including the representations and warranties outlined in the Sale & Purchase Agreement (SPA). If disagreements between shareholders regarding terms were to arise, there would be a higher risk of future disputes or complications.

PRO Tips:

• Make a clear transition plan, especially when it comes to important employees, clients, partners, and stakeholders. If there’s a chance that essential team members may not remain post-sale, address this with the buyer and explore strategies to reduce that risk, such as providing retention bonuses.
• Consider investing in Transaction Risk Insurance, which is typically purchased by buyers, but can also be obtained by sellers to protect all involved parties from losses due to unexpected issues related to the representations and warranties in the deal. This specialized coverage addresses the unique risks of M&A transactions that are not always covered by standard policies. It’ll help offset financial losses if losing important relationships results in a breach of sale terms, and acts as a valuable tool for mitigating disputes and securing shareholder approval for sale terms.

5. Cyber Risk

Cybersecurity incidents are among the top concerns for tech companies in Canada—and the risk of exposure heightens when M&A transactions are involved. Keep in mind that the buyer will be acquiring not just your business, but all the data associated with it. To mitigate the risk of cyber incidents, develop a plan to ensure that all of your networks and systems are fully up-to-date and secure prior to the transaction taking place.

PRO Tips:

• Assess your cyber risk. Take the time to review your cybersecurity and data storage practices—this will not only protect your business, but also boost your attractiveness to potential buyers. To further minimize your chances of a breach surfacing and ensure maximum security for all parties, have a third-party cyber security firm do both a scan and assessment of your risk level.
• Add an ERP to your Cyber Insurance to cover any claims related to incidents that occurred prior to the transaction’s closing. Your company’s data is one of your most valuable assets, and should be thoroughly screened and protected as such.

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